Is Beijing Yuanlong Yato Culture Dissemination Co.,Ltd.'s (SZSE:002878) Recent Performance Underpinned By Weak Financials?

With its stock down 17% over the past month, it is easy to disregard Beijing Yuanlong Yato Culture DisseminationLtd (SZSE:002878). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Beijing Yuanlong Yato Culture DisseminationLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Beijing Yuanlong Yato Culture DisseminationLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Beijing Yuanlong Yato Culture DisseminationLtd is:

4.2% = CN¥67m ÷ CN¥1.6b (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.04.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Beijing Yuanlong Yato Culture DisseminationLtd's Earnings Growth And 4.2% ROE

It is hard to argue that Beijing Yuanlong Yato Culture DisseminationLtd's ROE is much good in and of itself. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 4.9%. Given the circumstances, the significant decline in net income by 9.2% seen by Beijing Yuanlong Yato Culture DisseminationLtd over the last five years is not surprising.

So, as a next step, we compared Beijing Yuanlong Yato Culture DisseminationLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.8% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Beijing Yuanlong Yato Culture DisseminationLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Beijing Yuanlong Yato Culture DisseminationLtd Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 51% (implying that 49% of the profits are retained), most of Beijing Yuanlong Yato Culture DisseminationLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 3 risks we have identified for Beijing Yuanlong Yato Culture DisseminationLtd.

Moreover, Beijing Yuanlong Yato Culture DisseminationLtd has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we would be extremely cautious before making any decision on Beijing Yuanlong Yato Culture DisseminationLtd. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Beijing Yuanlong Yato Culture DisseminationLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com